How Climate Change Will Affect Your Real Estate Investments

Although there are still many people who deny that climate change is occurring, the overwhelming majority of scientists and climatologists believe they already have conclusive proof that climate change is underway and will only get worse.  Will this affect your real estate investments?  Yes, either directly or indirectly.

Climate change is generally centered around the increasing temperature of the earth’s thin biosphere caused by increasing carbon emissions and heat trapping gasses.  The effects are many and varied, and they go well beyond days being a couple degrees hotter on average.  For real estate investors – especially long term buy & hold investors – what do you need to consider?

• Sea level rise causing flooding: Sea levels have already started rising a bit.  However, there are bigger concerns than the immediate effects.  Small average rising temperatures can become self-reinforcing since the higher temperatures are retained as new baselines and heat increases on top of that.  Melting reflective ice eliminates that cold sink for the planet, in addition to directly adding more water to the oceans.  And warmer water expands just enough to make an appreciable difference over thousands of miles of ocean that are thousands of feet deep.  For anyone considering purchasing waterfront condos, SFR, retail, office, marinas, or anything else on the water, it is important to plan for high tides becoming higher over the long term.  Also, as effects start being noticed and investors become more aware, investors will pay progressively less for locations that may be risky and also hard to fully insure.
• Increasing weather extremes increase risk of property damage: One of the effects of increasing temperatures is increasing extremes in weather conditions.  Some people point to an occasional new record LOW temperature on a particular day as an anecdotal indication that climate change is not real.  What they miss is that weather extremes across the board are a part of average temperatures rising.  Extremes will directly result in property damage from wind, rain, heat, wildfires, and cold to exteriors, roofs, parking lots, and put more stress on HVAC systems.  More extreme weather events such as hurricanes and tornadoes will become more prevalent and forceful, plus spread to more locations.
• Increasing heat increases water evaporation and creates a lot more rain: Increasing heat results in increased evaporation, volume of rain events, and flooding potential.  That in turn may over-burden drainage systems, create ponding issues for crawlspaces, create infiltration issues for foundations, cause landscaping erosion, and increase hillside erosion.  In other areas, weather extremes may actually cause drought and decrease the desirability of that area for residents, farmers, and businesses.
• Weather extremes also raise flood levels well above averages: Even if average tide levels only increase an inch or a foot, high winds with high king tides can combine to magnify the actual sea level rise by several feet.  This may mean that a building is fine for the averages but it only takes one extreme to ruin its day.
• River level rise: Due to more extreme weather and increasing amounts of rain, flooding along rivers will accelerate plus experience new record levels.  It is not just along the oceans where you need to ensure plenty of protection from surrounding bodies of water.
• Affects low bank, medium bank, and high bank: Many people think of sea level rise affecting only low bank properties where the foundation of the home is at beach level very close to sea level.  They tend to think that something at the top of a bluff is protected by height.  However, that is not always the case.  Wave action at the bottom of bluffs will undercut the bluffs and accelerate their erosion (unless the bluff is solid rock).
• Landscaping will need additional maintenance and adjustment: Some landscaping will not adjust, and others will need more maintenance.  Increased watering may be needed as well in some areas.  Temperature extremes can also reduce plant and tree resiliency against insects and disease, increasing their mortality.
• Increasing insurance: For properties in areas affected by water level rise and extreme weather events, insurance will increasingly go up.  If certain conditions rise too significantly, some areas and properties may become unreasonably expensive to insure or simply uninsurable.  The US government’s National Flood Insurance Program (NFIP) through the Federal Emergency Management Agency (FEMA) has already become essentially insolvent due to high claims, though it has been continued (at least for now) through increased government expenditure from taxed sources elsewhere.
• Increasing loan costs: Lenders will likely reduce exposure to risky areas or raise loan costs to offset risk.
• Increasing taxes: Community level efforts to mitigate the effects of climate change will cost money, which will result in higher taxes.  This is already happening in Florida and some other states are actively looking at large climate related projects that will need to be funded.  Local building codes and their associated compliance costs will also increase.
• Climate refugees: Long term migration patterns may be affected by people moving away from weather extremes and toward milder climates or stability.  This will affect population level inflow and outflows of your most important customers: your tenants.

The highest risk property markets in the US for sea level rise are in Florida, New York, New Jersey, and California.  River rise risks exist throughout the country.  Hurricane risks are highest where they already occur, primarily in the southeast.  Tornado risks are also highest where they currently occur in the midwest, though may spread out some more to other locations.  Fire risks are most prevalent in the west, though that will spread as well if summers become hotter and drier in certain locations.

So, what can you do about this?

Problems can present opportunities, if proactively planned and properly managed.

First and foremost, support efforts at your own property, local community, and wider government levels to reduce the causes of climate change.  Be an active part of the solution, not part of the problem.  Some of these initiatives can even provide a financial return (utility reductions, insulation, energy efficient lighting, solar panels, etc.) while others are just needed to do the right thing (buying used though more efficient vehicles, upgrading old though operating boilers, increasing natural landscaping and trees, applying heat reflective roof surfaces, etc.).  Unfortunately, most people in the world are not willing to reduce their personal bottom line or convenience enough to make a difference, at least until this all becomes such a major problem at a personal level so that people get energized (likely too late) to make positive change.

If we assume that climate change will continue and increase, then your best line of defense is:

• Purchase in locations without potential flooding: Do not purchase properties in flood zones, and consider extremes beyond the averages.
• Purchase in areas with milder climates: Think ahead to areas that already have few extremes.  This significantly reduces the likelihood of more extremes, and it may also be a good indicator for future population migration patterns.
• Proactively maintain and reinforce: Depending upon the specifics of your property’s local weather related challenges, proactively plan, build, reinforce, and maintain your property accordingly.
• Include in due diligence: Consider weather factors in your due diligence process, both at the market level (susceptibility to large scale weather events) and property level (adjacency to potential issues such as body of water, hillside, dry forest).

Be one of the informed investors who has a long term view.  Even if you never sell and therefore avoid the potential issue of reduced valuation, you want to avoid your operating costs and tenant base being adversely affected by climate change.  Most importantly, be part of the solution and a leader in making positive change for your portfolio, your community, and your future generations.